NEW YORK — Investors are finding out what everybody else already knew: The consumer isn't going to spend the economy into recovery.
Major U.S. stocks indexes tumbled by the biggest amount in six weeks Monday as investors grew worried that they have been too quick to bet on an economic rebound during the market's five-month rally. Overseas markets plunged and investors' demand for safe-haven investments sent the dollar and Treasury prices shooting higher.
The Dow Jones industrial average skidded 186 points and the major indexes fell at least 2 percent. The Nasdaq composite index was hardest hit, falling 2.8 percent, but it also had the biggest advance as Wall Street rallied this year.
A shudder in China's main stock market touched off a wave of selling that spread to Europe and then the U.S. A drop in quarterly profits at home improvement retailer Lowe's Cos. added to worries that an improvement in the economy is far off.
Joe Saluzzi, co-head of equity trading at Themis Trading LLC, said the selling was warranted.
"The economics obviously don't support where we've been," he said.
The slide on Wall Street was steep but felt more controlled than the plunges of the past year because stocks ended just off of their worst levels and because analysts have been calling for a retreat after the Dow and Standard & Poor's 500 index raced up 15 percent in only five weeks.
The Shanghai stock market tumbled 5.8 percent Monday as investors worried that stocks had risen too quickly and that the Chinese government would tighten bank lending policies. Investors outside China have been hoping that strengthening there would spill over to other economies.
Worries grew when Lowe's said consumers are putting off big purchases. That's troubling because consumer spending accounts for more than two-thirds of U.S. economic activity.
Some investors used to seeing a quick bounce-back in stocks have underestimated how difficult the recovery could be, even though many analysts have warned that it could take well into 2010 for the economy to regain strength. And some traders seem to be in the same mind-set as three years ago, willing to take big chances even when there was little economic or corporate evidence to justify a huge advance.
Now, with consumers facing high unemployment, weak home prices and mounds of debt, investors are worrying that they had grown too optimistic even though the stock market tends to improve before the economy after a recession.
Quincy Krosby, market strategist for Prudential Financial, said investors are often divided at turning points in the economy because not all signs will point to recovery at once.
"The market and the data have been like a Rorschach test," she said.
The fears about China's recovery and consumers are contrasting with the market's reaction earlier this month to more upbeat signals, like an unexpected drop in the nation's unemployment rate during July.
Krosby said the earnings reports that drove stocks in the past month have largely been factored in, and now investors are finding little to convince them the economy is improving.
According to preliminary calculations, the Dow fell 186.06, or 2 percent, to 9,135.34. The Dow had been down almost 205 points at its low of the day.
The broader S&P 500 index fell 24.36, or 2.4 percent, to 979.73, while the Nasdaq fell 54.68, or 2.8 percent, to 1,930.84.
It was the biggest drop for major stock indexes since July 2, when a weak employment report fanned worries about the economy and pushed stocks down more than 2.5 percent.
About 2,700 stocks fell while only 335 rose on the New York Stock Exchange, where volume came to 1.2 billion shares compared with 1.1 billion Friday.
The S&P 500 index surged 49.7 percent from a 12-year low of 676 in early March to 1,013 last week. The index, which is the basis for many investments like mutual funds, has in the past 60 years hit bottom on average four months before a recession ended and about nine months before unemployment reached its peak.
Meanwhile, the yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.47 percent from 3.57 percent late Friday.
Many analysts say stocks have piled on gains too quickly.
"We have come an awful long way. To not expect a sell-off after the degree of increase — I think you're dreaming," said John Merrill, chief investment officer of Tanglewood Wealth Management in Houston.
The Chicago Board Options Exchange's Volatility Index, also known as the market's fear index, surged 14.9 percent to 27.9. The VIX is down 30 percent in 2009 and its historical average is 18-20. It hit a record 89.5 in October at the height of the financial crisis.
Overseas, China's main market fell 5.8 percent as investors worried that stocks had risen too quickly and the government would tighten bank lending policies. Japan's Nikkei stock average fell 3.1 percent as investors weren't satisfied by news that the country had emerged from recession in the second quarter.
In Europe, Britain's FTSE 100 fell 1.5 percent, Germany's DAX index lost 2 percent, and France's CAC-40 fell 2.2 percent.
Commodity prices slid as investors grew worried that demand would fall. A barrel of crude oil fell 76 cents to settle at $66.75 a barrel on the New York Mercantile Exchange. It is down more than 5 percent in two days.
Among companies reporting results Monday, Lowe's fell $2.36, or 10.3 percent, to $20.47.
The dollar rose against other major currencies, while gold prices fell.
The Russell 2000 index of smaller companies fell 15.72, or 2.8 percent, to 548.18.
By TIM PARADIS
AP Business Writer
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